Back From the Grave
In this issue:
We’re pretty sure that one day in the relatively remote future humanity will have had its fill of coal. It’s been the heating fuel of choice for a couple of centuries, but we now have better and ultimately more cost efficient alternatives with less downside for the environment and climate.
We’re also rather certain that the current revival in coal prices will run out of steam long before that. Coal mining is cyclical industry with plenty of spare capacity.
But right now it’s still a cyclical industry coming out of a historic slump after impoverishing a generation of investors. That’s a great setup for the three coal picks we’re adding this week to the couple that have been star portfolio performers for us in recent months. These names, two of which have only recently emerged from bankruptcy protection, are under-owned and undervalued,
We also continue to believe that Appalachian gas producers aren’t getting the respect they deserve, and Robert explains why in an oil and gas overview aimed at new subscribers.
One of those producers gets an update and an upgrade after making a landmark acquisition.
Our recent recommendation of MLPZ, the leveraged midstream sector proxy, has yet to pay off, but this is a patient speculation and we’re not at all deterred by MLPs’ recent sideways drift following the big springtime rally.
With many shale producers stepping up capital spending this year, we love the midstream sector’s prospects.
That’s also why we speculated this week on call options in our top Best Buy, Energy Transfer Equity (NYSE: ETE). The unit price has pulled back sharply from the summer highs amid uncertainty about whether the Dakota Access crude pipeline being built by an ETE affiliate will be completed despite mounting protests by Native Americans and environmentalists. ETE has also gotten mixed up in election-year politics this week on reports about its CEO’s large campaign contributions to benefit Donald Trump. This is mostly noise, while ETE’s legal case to secure the necessary river crossing permit for the largely completed pipeline looks rock-solid from here.
Our other portfolio addition this week was the refiner Marathon Petroleum (NYSE: MPC), and we also advised buying its near-term call options. As expected, MPC’s quarterly results reflected the weak summertime refining margins. But its plans to restructure its general partner interest in the affiliated MPLX (NYSE: MPLX) MLP are likely to prove more relevant in the coming weeks.
Portfolio Update
- Arch Coal (NYSE: ARCH) added to Aggressive Portfolio; buy below $90
- Contura (OTC: CNTE) added to Aggressive Portfolio; buy below $85
- Foresight Energy (NYSE: FELP) added to Aggressive Portfolio; buy below $7.50
- Rice Energy (NYSE: RICE) upgraded to a Buy below $29 in Aggressive Portfolio
Commodity Update
Oil prices slipped back below $50 on news that Iraq may not be on board with OPEC production cuts. But Saudi Arabia calls OPEC’s tune, and the Saudis have indicated that production cuts are likely forthcoming. I previously warned about natural gas prices, and even though winter natural gas futures are still trading above $3/MMBtu, the November contract slumped about 20% over the last two weeks before expiring. More on the outlook for oil and natural gas below.
In Other News
- Oil dropped back below $50/bbl on potential dissension within OPEC as Iraq demanded to be exempted from any production cuts by the group
- Although shares of Valero (NYSE: VLO) jumped after the refiner beat consensus earnings estimates, the company noted that its adjusted net income of $571 million was weighed down by $198 million of costs to meet biofuel blending obligations
- Several energy and manufacturing companies wrote a letter accusing the Obama administration of upending the law when it suspended the permit granted by the US Army Corps of Engineers for the Dakota Access Pipeline
- Despite downturns in oil production in the Bakken and Eagle Ford formations, output in the Permian Basin continues to grow as oil producers manage to turn a profit at $50/bbl oil
- The Energy Information Administration reports that global offshore oil production increased in both 2014 and 2015, reversing consecutive annual declines from 2010 to 2013 and accounting for nearly 30% of global crude oil production last year.
Stock Talk
Brandon Wooton
I have been waiting for this week’s submission in hopes a few topics would be addressed, since they were not, possibly you could expand on a couple of pointed questions.
The energy sector is in an undeniable rout, although that may not exactly be the best term as it indicates an “unorganized” retrograde. What we are seeing is a constant, constrained downward trend, seemingly to prevent the water from getting too bloody. Yet you are recommending coal and call options? Even if the companies you are recommending are unloved at the moment, but have solid fundamentals, a bear has entered the sector. This does not feel like profit taking.
What is your broad view, in light of recent downward pressure and the presidential ascension of a person who represents a coalition entirely hostile to reason and economics as they relate to the “evil” of fossil fuel?
Are broader term economic and social indicators not issuing a warning that the bond and stock markets are due for a major correction and are you factoring this in to your portfolio models?
This current downturn was not flagged by you and has left my portfolio bleeding red. While I, like many investors, have survived nasty market upheaval before, I need to know I am listening to the right people, and have confidence that you will be able to tell us when to bail, and not only be concerned with generating revenue from subscriptions.
Igor Greenwald
Robert will probably want to chime in too but I don’t see a broad bear trend; I see a shallow correction from a strong spring/summer rally that’s left the energy sector ahead of the market on a year-to-date basis (not that this is the only feasible yardstick.) As for politics, Robert and I believe that with rare exceptions you should leave them out of your investing decisions. The shale boom happened under a president ostensibly hostile to traditional energy production, so not much would change if Clinton is the one to follow Obama. The fate of coal demand in the U.S. and most other energy policies for that matter will ultimately decided in the courts by apolitical jurists following case law. I’d respectfully suggest tuning out the noise and modulating your emotions; that’s not always necessarily but they’re the simplest steps you can take to become a better investor. I’m very comfortable with my coal picks as aggressive speculations in the current environment, and reactions like yours make me more so, to be honest.
Brandon Wooton
A little history about myself. I have been a subscriber, on and off, to this letter since before either you or Robert were at the helm I have been investing since 2005 when I left school. Like many others I lost a tremendous amount during the crash, not only in the market but also in home value and wages. The crash that was fomented by “emotional” legislation to hand out loans to unqualified borrowers and exacerbated by virtually incomprehensible and poorly constructed financial vehicles. So maybe patronizing is not the tone you should be adopting.
What you should be worried about is the axiom, if one person is willing to say it, 100 people are thinking it. (It being: are you, somebody I am giving money to asses the energy sector, making the right choices?)
I have made no “emotional” investment decisions, no need to insult me. I am asking if you are worried about macro economic trends and poor monetary decisions made by the Fed to unsustainably prop up the stock market because that is now where everyone’s retirement fund is located. Are you contemplating the effects of the impending rate rise and its implication on energy sector? And given the increased hostility by those opposed to fossil fuels and the increasing lack of socially acceptable behavior, I anticipate a MUCH more hostile administration and antics by protestors akin to terrorism in the near future that will dampen the markets enthusiasm in the short and medium turn.
Maybe you guys should contemplate looking at the macroeconomic/societal risks and being open and informative about them, it’s not always sunshine and lollipops.
Robert Rapier
Whether we are the right guys can be determined by looking at our track record compared to the broader markets, or our competition for that matter. True, it’s been very hard to make money in energy the past 2 years. I have lost money. But these cycles end, and I think there is more upside than downside from here. I lost a lot of money in the 2nd half of 2008, then went on a huge bull run that ended in mid-2014. I take your point, but in almost every case your portfolio would have been better off investing with us than in investing broadly in the energy sector.
We have made very timely calls on the refining sector several times in the past 2-3 years, and I did in fact predict in 2014 (contrary to many) that oil prices had to fall. And we got conservative ahead of the fall. But such a steep fall is going to drag everything down.
As for politics, Trump would probably be good for the energy sector (although he is too unpredictable to say for sure that his policies would benefit the sector), and prior to this campaign Clinton was more conservative on energy policy than Obama. Bernie pushed her to the left, but I am not sure she stays that far left if she wins on issues like pipelines and fracking.
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Igor Greenwald
Certainly didn’t mean to insult you, but we’re definitely looking at the market in different ways, and you do seem to be more of a believer in politics and monetary policy debates as the cause of actionable market trends than I am. I advised calm after reading the words “rout,” “blood” and “bear” in your comment. If that framing has not caused you to make emotional investment decisions, that’s great.
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